Key Points

  • Retail sales rose 0.2% in June from the previous month, following a 1% increase in May, according to data released Thursday by the U.S. Census Bureau. Lower gasoline prices masked healthy consumer spending at retailers such as auto and electronics stores.
  • Despite a 5.3% drop in spending at gas stations after the Iran war ceasefire announcement and falling energy prices, retail sales recorded a fifth consecutive monthly increase, according to Census Bureau data. The government measures retail sales in dollars, so when fuel prices fall and consumers spend less on gasoline, overall spending growth slows.
  • Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, noted in a report that real household spending in the second quarter could grow at an annualized rate of 2.5%, "a marked improvement from the negligible 0.5% expansion in the first quarter."

In-Depth Analysis

Allen predicts retail spending could slow in the second half of 2026. He said: "The boost to cash flow from tax refunds has faded, leaving consumers more vulnerable to the real income shock from higher gasoline prices."

According to AAA data, the average price of regular gasoline has fallen from $4.04 to $3.94 per gallon over the past month, a drop of 2.6%. However, prices have surged 24.8% over the past year from $3.16 per gallon.

Allen added: "Meanwhile, given that a softening labor market is weighing on income growth and the personal savings rate is already at relatively low levels, the underlying trend in spending could be equally weak."

Consumers cut spending on clothing, groceries, and health and personal care products by 0.3%, 0.4%, and 0.8%, respectively, according to Census Bureau data.

"Over the past few months, as household budgets have come under pressure, the trend toward value-seeking consumption has become increasingly evident," the Bank of America Institute said in a report Wednesday, citing the bank's card data. "Spending at discount grocery stores has picked up amid higher gasoline prices. Meanwhile, spending on discount clothing is growing at the fastest pace in three years, though growth has slowed since April, possibly reflecting the fading impact of tariff-related price increases."

The Federal Reserve described a similar value-seeking trend in its Beige Book, which covers economic conditions across 12 districts since late May. "Consumer spending rose slightly, but higher prices, especially for fuel, dampened sales in other categories," the central bank said Wednesday. "Several districts noted declines in discretionary spending or shifts by consumers toward more affordable goods."

For example, the Boston Fed said "consumer spending grew modestly, supported by the World Cup soccer tournament, but many consumers showed greater price sensitivity."

Kevin Warsh, testifying this week before congressional committees in both the House and Senate for the first time as Federal Reserve Chair, said: "Household consumption growth is moderate." Overall, Warsh said "economic activity is expanding at a solid pace, showing resilience in the face of recent developments."